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In February, when Europe banned refined fuels, including diesel, from Russia, markets shrugged. As one of the largest suppliers to Europe of this important industrial fuel, a ban might have caused more disruption. Instead prices fell. Not any more. Since the summer oil traders are paying more attention to diesel.
Diesel supplies in Europe and the US are now tight. Refiners everywhere cannot make enough as the spread of diesel prices with other fuels and crude oil has opened wider — known as the crack spread. Indeed, the sanctions on Russian fuels have finally played their part, as has an attempt by Russia to conserve its own fuel supplies by cutting exports.
Partly due to the shift away from heavier Russian crudes, prohibited by western sanctions, diesel yields at European refiners have fallen. Even before the war, Europe’s refiners produced more petrol than diesel, notes Rystad Energy. With cold weather ahead — diesel can be used for heating — profits for refiners should rise.
Russia remains a key supplier of diesel to global markets. Its exports make up about a fifth of total seaborne trade, travelling through Turkey, north Africa and the Middle East since European sanctions took hold.
Low European inventory and limited spare capacity to produce diesel has kept traders bullish. Diesel crack spreads have doubled since July to $40 per barrel. Rising prices might explain why Russia decided to resume exports of dirtier diesel this week, after instituting a “temporary” export ban on fuels.
Refiners are the biggest beneficiaries. Among listed European integrated oil producers, Galp of Portugal and Spain’s Repsol are most geared to changes in refining margins, notes UBS. Their share prices have outperformed the broader European energy sector by 14 per cent and 7 per cent respectively over the past two months. Pure refiners such as Italy’s Saras and Greece’s Motor Oil have even more sensitivity.
Diesel’s bull run could lose steam should expectations of resumed Russian supply and increased output come true. For now, Russia can take advantage of the oil sanctions against it.
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